2010 September: Survival of the Fittest

At Oggi’s Pizza & Brewing Company, the recession first became evident last year. Our sales for stores open one year or more were stalled and, in some neighborhoods, were showing a decline. What wasn’t making sense was the pace of expansion in the restaurant industry all around us. With sales growth stalling or even falling at our stores, how could all of these chains continue to open new stores? It was almost like we were in a competition for sites — and the rents were becoming ridiculous. In our minds, we couldn’t figure out why the world wasn’t paying attention to the headlines coming from Wall Street. There was a credit crisis coming and the consequences of cheap money and loose regulations in the mortgage industry were about to send the economic world into a tailspin.

Of course, this was so different than what we had been experiencing –– we doubled in size during in the previous five years –– that it was like saying that the rain was coming even as the sun shined. The signs, though, were all around us. As in any bubble, the housing market behaved irrationally. Housing was experiencing what I can only describe as hyperinflation. People would compete with each other to buy properties, only to turn around immediately after the purchase and list it for sale at a higher price. Many times, this would also attract buyers competing with each other for the real estate — and the cycle would begin again in a manner that was obviously unsustainable. Bankers were lining up to supply this insatiable demand for mortgages, and they too became complacent in not requiring the borrowers to substantiate their incomes. These signs were all around us, but I suspect when you are experiencing it first hand, it is difficult to recognize the dangers that await you. There were other signs out there. Out of the blue, one of our franchise stores in northern San Diego County declared that he was in trouble. His location was just not generating the traffic that his high-priced lease had promised him. He was in a mall –– one of the first places to be hit right in the heart of consumer spending. Another franchise store was also struggling, but we had known this and were fighting what seemed to be an uphill battle to reverse the sales trends in that store. This store was in the Phoenix area and was also being hit hard by the real estate decline.

The signs were all around us. All anyone had to do was look at them. Well, we did. Not only did we see this tsunami, but we also prepared some measures that we felt would insulate our stores from the dangers. We at least prepared for the onslaught of bad economic news and did what I believe any business needs to do in this type of scenario — get in front of the curve.

Long ago, back in my graduate school days, we subscribed to the philosophy of being in touch with what was really going on. It stemmed from our reading of the book “Zen and the Art of Motorcycle Maintenance” by Robert M. Pirsig. I’ll never forget the part in the book where one of the riders on a motorcycle trip who relied only upon the gauges that indicated trouble broke down and had to cancel the rest of his adventure. In the meantime the other rider, who was very in tune with the noises and vibrations of his machine, felt that it was not running “right.” As a result, he put a fix in place so that he didn’t break down like the other rider. In our world, knowing what it was supposed to feel like as opposed to what it did feel like meant that we reviewed our key performance index numbers on a weekly basis. As we mentioned, the signs were all there.

Our strategy of co-branding with our local professional sports teams has undergone its test as a major strategy play for us. Our belief that it will carry us forward through this recession was further tested when we decided to sponsor the Anaheim Ducks even though the recession was looming down on us. Maybe I should say “because the recession was looming down on us.” We really believe in the soundness of this strategy for our concept. Nevertheless, we needed to make some adjustments to help us on the costs side. The moves that we engineered made us more efficient and cut our expenses as we headed into this dangerous climate. We cancelled our suite at Petco Park as part of our renewal with the Padres and reorganized management in the field. Now that our costs at the franchise level were under control, we concentrated on preparing our franchisees to survive and maybe even prosper in this storm. In the 2009 menu update, we introduced 27 new menu items for our customers to explore and experiment with. Our hope here was for us to tempt them with diversity and give them a reason to frequent us more often (while our competitors bombarded them with advertisements to try and lure them away). In addition to the new menu items, we introduced a newly designed menu format that included pictures of many of our dishes. Finally, we focused a lot of our attention on creating some below 550-calorie menu selections, which were highlighted in our menu as well as our advertising.

We would all like to believe that these measures helped our small chain weather most of the storm. The results seem to support that notion with same store sales declining 3.5 percent last year and running relatively fl at so far this year (down 1 percent). Our forecast is for same store sales to start improving in the second half. Let’s all keep our fingers crossed.

Our family is at the heart of our business. Each family member holds an important position in the hierarchy that is Oggi’s Pizza & Brewing Company. The fact that we have stayed together for so many years (just about 20) is a testament to mutual respect and familial love. Of course, all things eventually come to an end. It was our goal for the first generation to exit in a step-by-step fashion while the second generation steps up to lead the company. To a large degree, we seem to be achieving this. My daughter, Estella, was awarded her MBA from San Diego State late last year, which was the catalyst for the changing of the guard. She is following in my footsteps (MBA from Pepperdine University in 1985) and, quite honestly, has all of the knowledge necessary to bring Oggi’s and our business partners to the next level.

My son, Tommy, has also made an impact as he recently took command of the beer production portion of the business. Tommy is the general manager of Left Coast Brewing Company, the company charged with producing those award-winning micro brews that are served at our 17 outlets. Tommy has a degree in marketing from the University of San Diego, but has a love for brewing great beers. He recently traveled to Chicago to receive a gold medal for his Black Magic Stout Beer at the World Beer Cup. It was an honor beyond imagination for Tommy, who is recently married and brought his bride along for the ceremonies. At the award ceremonies, Tommy flew out of his seat as he heard his beer was the winner in the American Style Stout category. This type of enthusiasm is a critical aspect of his leadership style.

My nephew, Shawn, has been described as an Oggi’s expert. He can recite historical data as well as minutia only someone obsessed with this business can remember. As director of operations for franchising, Shawn has had a personal role in hiring most people, training them and watching as the stores spawned under his supervision embrace their markets with the newly minted franchisees in our system.

My wife, Dora, has always been involved, even though she is now stepping back a bit as we await our first grandchild. Although our family is important to the future of Oggi’s, expanding our horizons and bringing in fresh ideas as well as new people is even more important as we continue to paint the portrait that is our business. Making good hires is always a challenge. When you make successful hires, it can turn your world upside down, and mostly for the better. This has been one of the areas that has shown the most improvement during this period. Who knows, maybe we had a wider selection to choose from. Nevertheless, we have made great strides internally with a fantastic controller. We also hired a corporate chef to guide us through this nutritionally challenged era. Finally, we created a new position of franchise business consultant. This post will work directly with our franchisees in order to help them improve their business and their bottom lines. These three hires were made possible by our reorganization, which freed the funds necessary to improve our support staff.

Besides our new hires, we have invested in some management intelligence that will also give us a leg up on the competition. In this type of business environment, advertising becomes an important element of any offensive that you may have for your business. Just spending advertising dollars, though, isn’t enough. With redemption rates for normal advertising running at less than one percent, it becomes an exercise in futility when you spend your hard earned and limited advertising budget on something that returns one new customer for every 100 solicitations. We invested in market research software to help us better target our advertising to those customers that have the highest probability of responding to our offers. This partnership helps us to not only analyze demographic data, but now psychographic data, which will help us better understand our markets.

Making each advertising dollar count more is an important element in becoming more efficient — which can only lead to greater profitability. Of course, in order to fully utilize this, you first have to know what your customer looks like. What is your customer profile? The good news here is that this software is telling us. Armed with this knowledge, we are able to advise each of our stores more effectively as it relates to what to advertise as well as how to advertise it. Because this market has created the so-called “trading down” mentality, we are also busy conducting focus groups and trying to find out what our customers like and don’t like about us. In this economic environment, you can take nothing for granted.

At the end of the day, though, it all boils down to the customer experience. It is essential that you try and please each and every customer that chooses your restaurant over another one. Remember, the very nature of what we call a “recession” means that the market that you once catered to is now shrinking. Not only is it shrinking, but your remaining customers are being lured away by all of your competitors. To survive, you must never lose sight of quality of product and quality of service. Providing value in both pricing as well as total customer experience is about as important as oxygen in Maslow’s hierarchy of needs.

My brother, John, and I opened our first restaurant in 1991. It was the beginning of a terrible recession, and all of our plans were put on hold by an economy that was in transition. I remember the real estate agents when they told us of their rally cry: “Stay alive till ‘95.” Well, 1995 came and we were still standing. Interestingly, though, a lot of our competition was gone. What it meant for us was that in this now increasing expansionary market, we were positioned to enjoy a bigger piece of the market as those competitors who tried to hit home runs went out of business.

Sometimes hitting singles and scoring runs is better than that grand slam. When you swing for the fences, you sometimes have the propensity to strike out. In order to survive, we must look at each of our customers as potential singles and just keep doing the things that feel right for our circumstances.